International Relations/Trade, Livestock Production/Industries,

Anderson, John D.

Hudson, Darren

English

Research Papers in Economics

CHOICES
The magazine of food, farm, and resource issues
4th Quarter 2004 CHOICES 21
A publication of the
American Agricultural
Economics Association
4th Quarter 2004
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Potential Impact of Country-of-Origin 
Labeling on Beef Industry Structure
John D. Anderson and Darren Hudson
Nothing about COOL has been particularly simple. In
fact, COOL provisions represented one of the most vigor-
ously debated elements of the 2002 Farm Bill. Nowhere
was the debate over COOL more contentious than within
the beef industry.
Among beef industry participants at all levels, argu-
ments over COOL scarcely abated (and probably intensi-
fied) after the Farm Bill was passed. Predictably, much of
the debate over COOL focused on how much it would
cost (and who would have to pay for it). Estimating the
costs of COOL became a virtual cottage industry—with
estimates varying dramatically depending on assumptions
related primarily to record keeping and traceability
requirements. A good deal of debate also centered on the
potential benefits of COOL in terms of increased con-
sumer demand for beef. Here, as with cost estimates, it was
very difficult to arrive at a consensus. In early 2004, due at
least in part to the ongoing debate related to COOL costs
and benefits, Congress added an amendment to the 2004
Appropriation Act that delayed mandatory COOL for an
additional two years on all covered products except for fish
and shellfish (for which mandatory COOL took effect as
scheduled on September 30, 2004).
The beef industry’s focus on COOL costs is under-
standable. The industry currently is ill equipped to pro-
vide the level of traceability that the USDA has
consistently indicated the labeling program will require.
Sorting out how much it will cost to make compliance
possible is very important. But it is also somewhat surpris-
ing that an industry which has in the past seemed almost
preoccupied with structural issues (e.g., packer concentra-
tion and captive supplies) has virtually ignored the poten-
tial market structure implications of COOL legislation.
One vital element of the COOL legislation (as it is
currently written) is that retailers are responsible not only
for making sure covered products are labeled, but also for
documenting that labels are accurate. This situation means
that information on country of origin will have to be com-
municated clearly along the supply chain. In the beef
industry, where the supply chain is rather long and com-
plex, with ownership of cattle often changing several times
along the way, this task may be a real challenge. One logi-
cal way to deal with that challenge is through contracting,
or perhaps other forms of coordination.
In this article, we discuss how country-of-origin label-
ing is likely to affect vertical coordination/vertical integra-
tion strategies in the beef industry. In so doing, we seek
not only to inform the debate over COOL, but also to
place COOL within the larger context of industrial orga-
nization issues that have been the focus of much scrutiny
in the beef industry over the past twenty years. Consider-
ing COOL in this larger context may lead to a different
policy outcome than from a myopic focus on the costs
and/or benefits of this (or any other) individual program.
Vertical Coordination in the Cattle Industry
The issue of vertical coordination in the cattle industry has
been the subject of intense debate for many years. The pri-
mary focus of this debate has been on the use of market
power and “captive supplies” and their effect on cash mar-
ket prices. The USDA Grain Inspection, Packers and
Stockyards Administration (GIPSA) defines captive sup-
plies as any cattle that are under the control of the ultimate
buyer fourteen days or more prior to slaughter. The three
main categories of captive supply are packer-fed cattle, cat-
tle purchased through forward contracts, and cattle pur-
chased under marketing agreements.1
Figure 1 reports GIPSA captive supply data from 1999
t o 2 00 2  (t he  l a t e st  y e a r r e porte d ).  Ov e r  t ha t  pe r iod of
time, captive supplies increased from 32.4% to 44.4% of
total steer and heifer slaughter.2 Virtually all of that
increase occurred through the use of marketing agree-22 CHOICES 4th Quarter 2004
ments. These arrangements tend to
be longer-run, standing agreements.
They often give feeders considerable
influence over the timing of cattle
delivery. Such agreements also often
involve the use of individual (or grid)
pricing of cattle. In many cases, the
packer provides information on the
carcass merits of the cattle back to
the feeder for use in future manage-
ment decisions.
The inability of the price system
to efficiently convey information
along the supply chain often has been
cited as contributing to the substan-
tial decline in beef demand through-
out the 1980s. Although marketing
agreements and forward contracting
clearly provide a logical means of
dealing with this perceived problem,
the practice has been controversial.
This controversy stems from concern
that packers may be able to use cap-
tive supplies strategically to depress
prices. In 1996, GIPSA concluded a
multiyear, congressionally mandated
study of this issue. Results were
somewhat mixed, showing a negative
(but small) relationship between cap-
tive supply cattle as a percent of total
cattle purchases and transaction
price.
More recently, the controversy
over captive supplies has been taken
to Congress and the courts. The Sen-
ate version of the 2002 Farm Bill
included an amendment offered by
Tim Johnson of South Dakota that
would have banned “packer control”
of cattle prior to slaughter.3 The
Johnson amendment did not make it
into the final version of the Farm
Bill, but debate over the provision
was intense.
In the courts, in early 2004, an
Alabama jury issued a $1.28 billion
judgment against Tyson Fresh Meats
in a lawsuit brought by a group of
cattle producers. The suit alleged that
IBP (subsequently purchased by
Tyson Foods, Inc.) had used captive
supplies to depress cattle prices in the
spot market. A judge later overturned
the jury’s decision, stating that there
was no legally sufficient evidence to
support the jury’s verdict or the size
of the award. However, the issue has
not been put to rest, as the producers
have filed an appeal that will likely be
heard in early 2005.
Although many producers vocally
opposed the Johnson amendment to
the 2002 Farm Bill and the position
1. Marketing agreements estab-
lish an ongoing relationship 
between the buyer and seller of 
cattle, in contrast to forward 
contracts, which generally apply 
only to a single transaction.  
Marketing agreements typi-
cally specify the number of cat-
tle to be delivered per time 
period and the means by which 
cattle will be priced (often 
through a pricing formula).
2. GIPSA data on packer feeding 
go back as far as 1954.  GIPSA 
began collecting data on for-
ward contract and market 
agreement purchases in 1988; 
however, prior to 1999, GIPSA 
reported unaudited data as 
reported by packers.  Since 
1999, GIPSA has audited the 
data it reports.  For this reason, 
it is difficult to compare current 
data on captive supplies to that 
reported prior to 1999.
3. During debate over this provi-
sion, proponents of the ban held 
that the rather ambiguous term 
“packer control” referred strictly 
to packer ownership of cattle, 
not to forward contracting or 
marketing agreements.
Figure 1. Packer feeding and forward purchases as a percentage of total steer and
heifer slaughter-four largest packers.
Note. From USDA Grain Inspection Packers and Stockyards Administration. (2004). Packers and Stockyards 
Statistical Report: 2002 Reporting Year (GIPSA SR-04-1). Washington DC: USDA.
8
.
5
9
.
1
1
0
.
9
9
.
6
3
.
3
2
.
0
2
.
5
2
.
4
2
0
.
7
2
7
.
1
2
9
.
5
3
2
.
4
0
5
10
15
20
25
30
35
40
1999 2000 2001 2002
%
 
o
f
 
t
o
t
a
l
 
s
l
a
u
g
h
t
e
r
Packer fed
Forward contract
Marketing agreement4th Quarter 2004 CHOICES 23
of the plaintiffs in the Pickett vs.
Tyson Fresh Meats case, grassroots
support for both of these causes has
been significant—has been, in fact, a
driving force. For example, an amicus
brief was recently filed in support of
the  Pickett appeal. This brief was
joined by more than 50 individuals
and grassroots organizations, includ-
ing many with a national presence
such as the Ranchers-Cattlemen’s
Action Legal Fund, United Stock-
growers of America (R-CALF USA),
the Organization for Competitive
Markets (OCM), and the National
Farmer’s Organization. These, along
with many other producer groups on
record as being strongly opposed to
the practice of packer feeding and
contracting, are also among the most
ardent supporters of mandatory
COOL.
Changing the Rules Requires 
Changing the Structure
Given the current structural state of
the industry and the visceral obses-
sion with market structure issues, it
seems ironic that the implications of
COOL on the structure of the beef
industry have not been a large issue
in the COOL debate. Because
COOL requires retailers to be able to
guarantee the accuracy of their label-
ing, a fundamental shift in the trans-
actions cost for retailers would be
expected. In a world where “anything
goes,” an open market procurement
system where retailers seek out the
lowest cost source of supply is suffi-
cient to coordinate production and
consumption. When one factors in
supply risk and food-safety concerns,
the incentives for retailers to verti-
cally coordinate with packers and
wholesalers becomes more impor-
tant, leading the industry beyond its
current structure.
The mandatory COOL program
adds the requirement that the retailer
be able to guarantee information on
the source of the beef being presented
to consumers. The question is: “How
might one achieve this high level of
information availability and integ-
rity?” In the absence of some inter-
vening force, the costs of researching,
certifying, and trusting source infor-
mation in an open procurement mar-
ket are surely higher than if the
system were vertically coordinated. If
that hypothesis were true, then the
impact of COOL on transactions
costs would suggest that the policy
creates more pressure for contracting
in beef, not less. Grassroots organiza-
tion within the beef industry that, on
the one hand, argue vociferously for
COOL, but, on the other, display
considerable antipathy toward con-
tracting, demonstrate that the poten-
tial linkage between COOL and
contracting has not been adequately
explored in this debate.
To illustrate the argument in a
context that is free from the emo-
tional baggage of COOL, consider
the case of a retailer that wanted to
market a product based on its loca-
tion of origin because it perceived
that consumers valued that informa-
tion. Now, one could simply go into
the market and purchase the product
with little concern about the “truth”
of the claims by the wholesaler. But,
one could imagine the Dateline TV
exposé on your company when they
find out that you are making claims
you cannot guarantee and the requi-
site class-action lawsuits that follow.
So, what do you do? One logical
solution is to bind the wholesaler in a
contract which shifts the legal liabil-
ity for certifying that your product
does, in fact, come from where you
claim it does from yourself to the
wholesaler. The wholesaler, of course,
wishes to shift legal liability back to
the processor, and, so on. The central
point of this simple illustration is
that a choice by the retailer to pro-
vide information on a product
attribute as a marketing tool led to
this shift in market structure. In
COOL, the provision of this infor-
mation is mandated.
One should recognize that there
are many simultaneous forces exert-
ing themselves on the beef market—
foreign animal diseases, product
branding, international sourcing and
trade restrictions, to name a few—
each with potentially different effects
on market structure and perfor-
mance. The structural impacts of
COOL are just a part of the myriad
of issues facing the beef industry.
However, it seems clear that without
some intervening force, COOL is
likely to increase pressure for con-
tracting in beef.
The Potential Intervening 
Force—Animal Identification
The potential impact of COOL on
the use of forward contracts and mar-
keting agreements in the cattle indus-
try has been complicated somewhat
by the related issue of animal identi-
fication. In the wake of the Decem-
ber 2003 discovery of a dairy cow in
Washington state infected with
Bovine Spongiform Encephalopathy
(BSE), the USDA announced its
intention to implement a compre-
hensive animal identification pro-
gram. Although the ID program
would be geared toward providing
rapid animal tracking capabilities in
the event of a disease outbreak, such
a system could perhaps be useful in
meeting the requirements of a food-
labeling program like mandatory
COOL.
The National Animal Identifica-
tion System (NAIS), as currently pro-
posed, would include a uniform24 CHOICES 4th Quarter 2004
individual-animal numbering system.
Production information would not
be required; however, information on
animal movement (both intra- and
interstate) as well as changes in own-
ership would be tracked in the sys-
tem. The result will ideally be a
concise, easily accessible record of
where an animal originated and
where it has been throughout its life.
If the NAIS can feasibly be
implemented as planned, the infor-
mation it could provide ought to
facilitate the development of a
COOL program. Each animal would
have a record of its origin and move-
ment. That record would, by design,
follow the animal through the supply
chain. This tracking capability is
consistent with the needs of the
COOL (or any other labeling) pro-
gram.
The NAIS will not necessarily
address all of the concerns related to
COOL (e.g., additional costs
required for segregating product by
location of origin at the wholesale
and retail level); however, it does
potentially represent one reasonable
means of collecting and transferring
the information required for the
COOL program. Consequently, an
effective identification system poten-
tially reduces the incentive for con-
tracting created by COOL. If the
provenance of every steer and heifer
coming out of the feedlot is readily
available through the identification
system, there is less reason for retail-
ers to rely on contracting as a means
of reliably and efficiently securing
this information.
Although the NAIS would pro-
vide tracking capability from birth to
slaughter, one should keep in mind
the difficulty of maintaining identifi-
cation from slaughtering through
fabricating a carcass into many hun-
dreds of products. Animal tracking is
one part, but keeping identification
through processing is more difficult
and potentially costly. Exactly how
beef trimmings are to be identified is
not clear. Plants or days could be
identified as US only, but these struc-
tural issues certainly will affect trans-
action costs. Although they may
satisfy COOL requirements, they
may not be a traceback system.
Although a national animal iden-
tification system may reduce the cost
of country-of-origin labeling, this is
not to say that it will reduce total
costs to the system. The higher trans-
action costs associated with the
requirements of labeling will, in
effect, become costs associated with
the identification program—a pro-
gram that provides additional bene-
fits besides simply facilitating origin
labeling. These costs will be the same
whether animals are contracted or
traded on the open market, because
the requirement of the identification
program will have to be met on all
animals. 
Summary and Conclusions
Well over two years have elapsed
since passage of the COOL provi-
sions in the 2002 Farm Bill. In that
time, few if any of the more contro-
versial aspects of the policy have been
resolved, at least within the beef
industry. Debate still swirls around
questions such as how much the pro-
gram will cost and what its potential
benefits might be. At the same time,
controversy continues to surround
the issue of vertical integration and
coordination in the beef industry.
Pending court cases and the potential
for additional legislation related to
captive supplies will keep this issue
front-and-center for the foreseeable
future.
The relationship between manda-
tory COOL, captive supplies, and
other structural changes in the beef
industry (e.g., closer vertical coordi-
nation between processors and retail-
ers) has unfortunately been virtually
ignored in the lengthy debate over
labeling policy. It is long past time for
industry participants and policy
makers to take up this discussion.
Some important issues should be
addressed now in order to avoid (or
at least minimize) further controversy
in the future.
If mandatory COOL does lead to
greater vertical coordination through
nonprice means (such as forward
contracting and use of marketing
agreements) what are the implica-
tions for the beef industry? For exam-
ple, will price discovery problems
associated with thin markets (already
a topic of discussion in the industry)
become a significant problem? More
generally, will industry participants
view an increase in captive supplies as
an acceptable side effect of COOL,
or will this simply exacerbate the cur-
rent conflict, leading to additional
litigation and political maneuvering?
Historic precedent in the industry
clearly favors the latter outcome.
That being the case, industry leaders
and policy makers would do well to
consider what might be done now to
reduce the potential for future con-
flicts—perhaps, for example, making
changes to the provisions of manda-
tory COOL and/or working to more
explicitly align the goals of COOL
and the nascent NAIS. 
  John D. Anderson is an associate
extension professor and Darren Hud-
son is an associate professor in the
Department of Agricultural Econom-
ics at Mississippi State University.

Potential Impact of Country-of-Origin Labeling on Beef Industry Structure

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